British businesses are bracing for their steepest price increases in over two years as oil-driven inflation from the Iran conflict reshapes corporate expectations across the UK economy.
According to the Bank of England’s latest Decision Maker Panel, firms now forecast inflation at 3.5 percent over the coming year, up from 3 percent in February. That marks the highest reading since late 2023 and signals companies are internalizing energy price shocks as sustained rather than temporary.
Fewer rate cuts on the horizon
The inflation jump has forced businesses to dramatically revise their interest rate expectations. Before the conflict, markets priced in multiple Bank of England rate cuts. Now, firms expect just one reduction in the next twelve months and only two by 2029.
Brent crude holding above 100 dollars per barrel anchors that outlook. Energy feeds into every layer of the supply chain, from transport to manufacturing to commercial heating.
Price increases already in motion
Companies plan to raise their prices by an average of 3.7 percent over the next year. Industry groups warn grocery costs could climb as much as 9 percent before year-end, while household energy bills will face another sharp lift when the next Ofgem price cap begins.
Workers face a squeeze. Expected wage growth dipped slightly to 3.4 percent while inflation expectations rose, meaning real pay is set to stagnate. Firms also anticipate a slight drop in headcount over the next year, flipping earlier hiring plans.
The growth question
The UK economy grew just 0.1 percent in the final quarter of last year and faces headwinds from several directions. OECD projections rank the country among the weakest growth and strongest inflation profiles in the G7. Government bond yields remain above pre-conflict levels, and companies already carry the burden of higher minimum wages and increased business rates.
Pantheon Macroeconomics analyst Elliott Jordan-Doak noted the energy surge is already shaping corporate decisions. “Higher costs are weighing on hiring plans and leading to increased price-setting intentions,” he said, though he added that longer-term inflation expectations remain anchored for now.
For the Bank of England, the calculus is tight: hold rates steady and risk choking off growth, or cut and risk letting inflation embed further.